Energy policy: political courage or hypocrisy?

22 August 2008

The recent run up in oil prices to $150 per barrel has concentrated minds wonderfully. The world went through a long period in the 1980s and 1990s when energy was rarely in the news. A sense of complacency developed as governments abandoned any idea of energy policy through adherence to so-called market principles. The UK was an extreme case of this – abundant North Sea oil and gas took energy off the newspaper front pages for two decades.

Now it’s back with a vengeance – just like the good old days in the 1970s. The seeds of this came in the 1990s with the growing concerns about the impact of energy use on carbon emissions (and hence potentially on climate change). Energy security worries added to this, as countries have become concerned about dependence on imported oil and gas from potentially politically unstable sources. With the oil price rocketing, we now have a ‘perfect storm’, the ramifications of which will be considerable. Energy policy is certainly back as a key area for debate, both within countries and in the key international forums. We know that people only get interested in energy when there’s a crisis looming, in pricing or in supply security. But have the politicians the courage to put into practice what is necessary, or will they abandon good sense and pander to particular interest groups?

The key target must be to end the world’s drug-like addiction to fossil fuels. This is going to be very difficult – successive International Energy Agency (IEA) World Energy Outlook reports show that, on unchanged policies, the world will remain completely hooked on carbon up to 2030, with coal and gas use rising sharply as oil slows down. Nuclear and renewable energy sources will make little impact on this. The implications for carbon emissions are very worrying, even for those not totally attached to the global warming story. The precautionary principle suggests that, at the very least, we should be trying to stabilise carbon emissions at somewhere not much above the current level, but without imposing huge costs on society. Yet the biggest obviously measurable impact of burning carbon fuels is on air quality – thousands of people are dying prematurely today in China, India and other developing countries through lung infections caused by bad air quality. The potential impact of carbon on climate change is less easily measurable, but must inform policymaking today.

This points to the necessity of introducing sound policy measures which will penalise carbon for its adverse environmental impacts. Either emissions trading regimes or carbon taxes can achieve this. In fact, the current increase in world oil, gas and coal prices provides an interesting opportunity to observe the impact that a carbon tax would have. The effect is very hard to assess but it is likely that people will begin to save electricity in the home and make fewer journeys in their private cars. So energy demand itself will be reduced, but by how much is difficult to say. Should carbon-emitting technologies be developed the economic case for nuclear, hydro and other renewables will be improved. It will take time, however, for the electricity generation mix to change appreciably.

But will governments have the courage to add further costs to energy, at a time when prices are rising steadily anyway? There must be some doubts about their political courage here. Indeed, there have even been some proposals from politicians seeking popular votes to cut taxes on fuel, to shield consumers from price increases. The energy price increase is imposing a huge shift in world income away from importing countries to the energy producers, in particular the oil-rich countries, such as Russia and Saudi Arabia. This may well induce recessions in some countries, particularly those heavily dependent on energy imports, such as Japan, Korea and the Southeast Asian countries.

The potential political problem would seem to be particularly acute in the USA, where two candidates are vying for the presidency in November. Most Americans now seem to want to take action to avert global warming. Both presidential candidates Barack Obama and John McCain are proposing cap-and-trade approaches. But even more than curbing carbon emissions, American voters demand cheap fuel for their monster vehicles, so both candidates are catering for this appetite by suggesting petrol tax holidays, new plans for offshore oil drilling, windfall taxes on oil companies and the like. Nobody seems sure whether to tax energy or to subsidise it. The confusion can only be averted by the political courage to suggest that energy should be expensive rather than close to free, and then to confront voters with choices as if they were adults.

The USA has a compelling economic and geopolitical interest in cutting its use of oil (especially that imported from unstable suppliers) and curbing its emissions of greenhouse gases. The right way is to pursue those goals in many different ways, such as diversifying sources of supply, energy conservation, alternative technologies (nuclear and renewables), plus carbon capture and sequestration. Whichever way this is achieved, either through a system of controls, subsidies and regulations or via a simple and explicit carbon tax, energy has got to be made a lot more expensive.

“Nobody seems sure whether to tax energy or to subsidise it”

The best policy is to get prices right and let the market do the rest. If the oil price falls, as no doubt it eventually will, it will be an excellent opportunity to introduce a carbon tax to set a floor, making the transition to sensible energy prices much easier. With correct energy prices, other possible policy actions are unnecessary – they only exist because energy has been so mispriced in the past. There is no need to bother with fuel economy limits for cars, subsidies for conservation or low carbon fuels, emissions trading schemes (which are inferior to carbon taxes anyway owing to the waste, complexity and horse-trading that takes place in the European scheme), nor a need to attack the big oil companies. Carbon tax revenues can be used to cut other taxes, if desired, particularly if economic recession appears to be looming.

A major difficulty for nuclear is that many people will only endorse it when all other options have run out. If the case for curtailing carbon emissions is accepted, there are no credible policies that avoid an enhanced role for nuclear. Yet it needs more active and positive support, rather than being left as a last resort. If the latter mindset prevails, projects will surely get cancelled as soon as there is any emerging viable alternative possibility. With appropriate energy pricing, the economic case for nuclear begins to look more and more compelling in its own right, even if the capital cost of plants rises sharply. This has to be the very best argument for nuclear – cheap and stable power prices – and the industry should do much more to promote it.

People may also turn against caring about the environment if economic times get hard. There is a whole new generation of workers in many countries aged 20 to 35 who have never experienced an economic recession of any magnitude. Their behaviour is quite unpredictable under such circumstances. One reaction could be to care less about longer-term issues such as the environment and security of supply, focusing instead on immediate economic security. Global warming may conceivably decline as the ‘big issue’ – indeed, cost benefit analysis suggests that, given the significant costs of doing something about it (vastly underestimated in the 2006 Stern Review on the Economics of Climate Change) there are better ways of improving the fortune of the world’s poor, mainly by decent healthcare and agricultural policies. So it is an incredible mistake for the case for nuclear to be made solely on the environmental angle – it also brings with it some odd bedfellows who may prove eventually to be false friends.

The time lags before programmes can get going also pose a difficulty for nuclear becoming the salvation for world energy and environmental problems. Yet the sooner you get started, the sooner you finish – this is better adduced as a sound argument against further delay. Along with the courage to encourage higher energy prices, politicians need to get the frameworks, within which the nuclear industry operates, completely sorted out. Regulatory and planning regimes need to be simplified and explicit waste management policies devised. Again this will require a degree of political courage, rather than pandering to the mass of interest groups in these important areas. Strong leadership is needed – the potential magnitude of the coming energy and environmental crisis demands this. We may joke that the best potential Western nuclear figurehead for security supply reasons may well turn out to be Vladimir Putin, but the industry needs people who can put all the fine words of recent years into action, and very soon too.

If nuclear cannot succeed in the current highly favourable set of circumstances, it never likely will. Certainly not before a technological leap occurs, as to Generation IV reactors. Yet only a true nuclear renaissance will stimulate such research efforts into delivering operating reactors, through the commercial companies getting directly involved. If such programmes remain within governmental and research orbits, progress will always be slow.

In summary, we can say that we’ve learned a lot in recent years about the limits of the markets in energy policy, but they do have an important role to play. Governments cannot simply abandon energy policy – they have to set correct frameworks and then allow markets to do their job. To the credit of the UK government, this is actually what it appears to be doing on nuclear policy, but it must now deliver and not think of easing the burden of rising petrol prices and electricity tariffs. Like potable water, often previously regarded as a free good by many consumers, energy must be priced to build in its scarcity, cost of production and environmental impact. Then we’ll have a chance of moving to a much saner and secure world.

Author Info:

Steve Kidd is Director of Strategy & Research at the World Nuclear Association, where he has worked since 1995 (when it was the Uranium Institute). Any views expressed are not necessarily those of the World Nuclear Association and/or its members

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